Question

Imagine an isolated economy made up of individuals who are both consumers and sellers. The table below tracks the income and spending of a small part of this economy: 8 individuals called A through H. Naturally, the whole economy includes additional people Assume that individual A has just decided to spend $9.000 in a store owned by individual Band that individual B, along with everyone else in this economy, has a marginal propensity to consume (MPC) of 0.8. points Instructions: Round your answers to two decimal places when appropriate eBook a. Assume that every individual who receives additional income will spend an additional amount according to his or her MPC. Use this Information to complete the table below. References Calculating the Expenditures Multiplier Extra Income Individual (dollars) Extra Expenditure (dollars $9.000 B $9,000 TUTTI b. What is the cumulative expenditure for individuals Athrough H?

Answer 1

(a)

In this case, spending by one becomes income of the other.

Spending by A of $9,000 becomes income of B.

With MPC of 0.8, B spends ($9,000 * 0.8) $7,200 which become of income of C and so on.

Following is the complete table -

Individual	Extra Income	Extra Expenditure
A	-	$9,000
B	$9,000	$7,200
C	$7,200	$5,760
D	$5,760	$4,608
E	$4,608	$3,686.40
F	$3,686.40	$2,949.12
G	$2,949.12	$2,359.29
H	$2,359.29	$1,887.43

(b)

The cumulative expenditure for individuals A through H is $37,450.24.

(c)

MPC = 0.8

Calculate the Expenditure Multiplier -

Expenditure Multiplier = 1/(1-MPC)

Expenditure Multiplier = 1/(1 - 0.8) = 1/0.2 = 5

The Expenditure Multiplier is 5.

(d)

Additional expenditure = $9,000

Expenditure multiplier = 5

Calculate the total increase in real GDP -

Total increase in real GDP = Additional expenditure * Expenditure Multiplier

Total increase in real GDP = $9,000 * 5 = $45,000

Thus,

The total increase in real GDP is $45,000.